Jeremy Warner's Outlook: The planned cost-cutting at IBM speaks volumes about Europe's inability to compete

Another lurch down at troubled ICI; LSE bidders must be sent packing
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The Independent Online

There are few better illustrations of the economic sclerosis that grips Western Europe than IBM's decision to axe 13,000 jobs, most of them in Germany, France, Italy and the UK. If policymakers needed anything further by way of a wake-up call, this is it.

There are few better illustrations of the economic sclerosis that grips Western Europe than IBM's decision to axe 13,000 jobs, most of them in Germany, France, Italy and the UK. If policymakers needed anything further by way of a wake-up call, this is it.

In already high unemployment Europe, slow growth and progressive loss of competitiveness is causing some of the world's most iconic corporate brands to rein in so as better to concentrate their resources and capital on the higher growth markets of Asia and the US. The abject failure of the Lisbon agenda, laughably designed to make Europe into the most competitive economic region in the world by 2010, is there for all to see. Europe has been unable to convert words into action.

Now, just to get this in proportion, IBM's decision to cut so many jobs is in part just a routine piece of cost cutting after a run of disappointing earnings statements. Thirteen thousand is an awful lot of people to fire, but it is only 4 per cent of the global workforce, and even if all the job losses were to fall in Europe, they would still amount to only 13 per cent cent of those IBM employs in Britain and on the Continent.

Oddly, for a company meant to be at the cutting edge of computer and networking technology, IBM was growing fat and bureaucratic, with too many layers of management to respond to customers' needs. Something had to be done to restore profits and competitiveness.

Yet IBM's cull is also because Europe is no longer seen as a continent of market opportunity. There's not enough action and too few big orders to justify sustaining such a large workforce. By contrast, IBM is expanding and taking people on in Asia.

Today the focus is on IBM, but the company is no more than a microcosm of what's going on across the business scene as a whole. With unemployment at more than 10 per cent in Germany and France, things are already serious. They seem destined only to get worse. These countries have failed hopelessly to prepare themselves for the onslaught of global competition.

A spokesman for the British trade union Amicus was yesterday quoted as saying he feared the brunt of the job losses would fall on Britain because it is "quicker, cheaper and easier" to get rid of workers in the UK than on the Continent. His reaction is understandable enough, but it is also precisely the wrong way of looking at the problem. The industrial and labour protections that exist in Europe are one of the primary causes of the Continent's growing economic paralysis, for it means that capital and skills that could be devoted to new forms of wealth creation get locked into dying and uncompetitive industries.

Here in Britain, we've been getting it more right than elsewhere in Europe. Our labour and capital markets are more flexible, we are more open to foreign investment and ownership, and our industrial policy is based on nurturing competition rather than futile attempts to create national champions. Tax policy has been deliberately designed to attract foreign capital, wealth and skills. All too often on the Continent it seems there to deter them.

When Labour came to power eight years ago, it swore to abolish the non-domiciled resident tax concession, which allows wealthy foreigners to live in Britain without paying any tax on their overseas earnings. Once ministers realised that half the super rich of Britain would up sticks and leave, not to mention a large proportion of the City, they soon changed their minds. Others are fast learning our tricks. Only the once great economies of Continental Europe and Japan seem stuck in the blind alley of past protections.

Lou Gerstner called his account of the historic corporate turnaround he engineered at IBM Who Says Elephants Can't Dance?. Regrettably, there is little sign of dancing by the mighty she elephant called Europe.

Another lurch down at troubled ICI

Not much remains of the ICI I used to report on as a fresh faced, young financial journalist 25 years ago. Back then it was still regularly referred to as the doyen of British industry, a bellwether stock from which it was possible to take the temperature of the British economy as a whole. Its management trainees were the cream of British graduates, and its pay and perks were the past equivalent of today's top City investment banks. How times change.

The fastest growing bit, pharmaceuticals, was demerged to form the basis of today's AstraZeneca. Bulk chemicals were sold or closed, and it is really only the Dulux paints business which remains as a reminder of a once proud past. Today the company is still struggling to come to terms with its disastrous acquisition for nearly £5bn in cash of Unilever's speciality chemicals business.

This has turned out to be almost as much of a commodity business as the ones ICI was trying to get out of, and it saddled the company with mountainous debts from which it has only recently begun to recover. Offloading this pile of junk on to ICI at such a heroic price is still regarded by Niall FitzGerald, the chairman of Unilever at the time, as one of his finest hours.

Poor John McAdam, plucked from Dulux two years ago to try to salvage something from the fast-sinking ship. He's done well in delivering on his promises only to find that the market is now slipping away from him again. Yesterday's warning of renewed weakness in European markets knocked 6.5 per cent off the share price. Twenty-five years of decline, and even now ICI may not yet have hit bottom.

LSE bidders must be sent packing

The best reason for disallowing rival bids from the Continent for the London Stock Exchange is hardly touched on in the "issues letter" published yesterday by the Competition Commission, the UK authority which is investigating the offers. This is the concern expressed a while back by the Financial Services Authority that a foreign takeover of Europe's largest stock exchange might damage the City's competitiveness as a financial centre.

It seems to me plain as a pike staff that this would indeed be the case. A system of competing national exchanges is bound to be better for London, and indeed Europe as a whole, than the hegemony ultimately envisaged by both the Continental bidders. The two of them, Deutsche Börse and Euronext, each promise to keep the London market separate, subject to local regulation, locally determined listing rules, and customers' own choice of settlement and clearing arrangements.

Yet that cannot be the ultimate intention, for to be just a collection of different local exchanges doesn't begin to tap the potential cost savings and synergies to be gained from having a common platform for European equity trading. There might be some public interest benefits to be had too from a single European stock exchange. The deeper pools of liquidity this would allow should lead to greater efficiency and a consequentially lower cost of capital for listed companies.

The downside still none the less outweighs any potential benefit. Greater monopoly would mean less innovation. To safeguard customer interests, prices would have to be regulated.

The movement to a common platform would inevitably mean common listing requirements. National variation in rules and regulations is at present a key competitive tool in the fight for new listings. Would it, for instance, be remotely likely that the Alternative Investment Market (AIM), would have been created by the euro-leviathan envisaged? Since its formation, AIM has attracted more than 1,000 listings, many of them overseas companies, and generated nearly a £1bn in listing fees for the City. That's not something likely to have happened had our equity trading been offshored to Paris or Frankfurt.

The City and its customers are best served by competing national stock exchanges. We can only hope that the Competition Commission has the nous to recognise it.

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